Goldman Sachs: Brace for 8% Drop in S&P

Investors can expect the Standard & Poor’s 500 to drop 8 percent by the end of this year due to tax and spending uncertainties, Goldman Sachs analysts warn.

The selloff would come fresh in the heels of a 7 percent decline posted since September.

Blame uncertainty surrounding the fiscal cliff, a combination of tax hikes and spending cuts scheduled to kick in at the end of this year, which could siphon over $600 billion out of the economy next year and send the country sliding into a recession if left unchecked by Congress.

Even if lawmakers do strike a deal, uncertainty alone will roil markets as individuals and businesses still won’t know what they are going to be paying in taxes next year, including taxes on investment income such as dividends or capital gains.

Add to that uncertainty that lawmakers must debate anew whether or not to raise the government’s debt ceiling early next year.

“Uncertainty swirling around the fiscal cliff that must be resolved by year-end, the pending jump in capital gains taxes at the start of 2013 and the debt ceiling that will be reached in late February, represent clear and present downside risks to the market in the near-term,” Goldman Sachs analysts wrote in a note, CNBC reported.

The S&P 500 is currently trading around 1,350.

David Kostin, chief U.S. equity strategist at Goldman Sachs, wrote in the note that he was pegging the chances of lawmakers striking a deal by year-end at 55 percent.

Once the fiscal cliff is resolved, the S&P could post nice gains in 2013, gaining 16 percent by the end of next year from current levels.

“The S&P 500 has near-term political risk but long-term policy support,” Kostin said in the note.

“Although we believe investors will have an opportunity over the near term to buy the S&P 500 at a level below today, portfolio managers with a longer-term horizon should consider increasing equity exposure.”

Some investors say even if New Year’s Day comes and goes without a deal, it won’t be the end of the world.

Higher tax bills won’t come due the next day and spending cuts won’t take place on Jan. 2 either, which would give policymakers time to avoid disaster.

“It is not impossible at all that they miss by a little and then come back and get it,” said billionaire investor Ken Fisher of Fisher Investments, which oversees $38 billion in equities, Reuters reported.

“There’s a minor risk ... but getting it done 10 days later is not really a big deal.”

Legendary investor Warren Buffett agreed.

“We are not going to permanently cripple ourselves just because 535 people can’t get along,” Buffett told CNN, referring to Congress.

Even if lawmakers take two months to strike a deal, the United States can still avoid a recession next year.

“The fact that they can’t get along for the month of January is not going to torpedo the economy.”